Inflation hitting state agencies as budget leaders brace for possible recession

Inflation hitting state agencies as budget leaders brace for possible recession

By MARY SELL, Alabama Daily News

MONTGOMERY, Ala. – The Alabama Bureau of Pardons and Paroles has a total of 501 vehicles, many of which staff use to do status checks on the 44,000 people the agency monitors.

The agency had previously spent about $66,000 a month on gas. Now, it’s about $125,000 per month.

“Even though we budgeted for inflation, none of us budgeted for this,” ABPP Director Cam Ward told a panel of lawmakers at the State House on Thursday.

In response to rising costs, Ward said the agency plans to park some of those vehicles later in the summer. 

“It will mean a decline in supervision,” Ward said.

He was the first of several agency leaders Alabama House and Senate General Fund budget committees will hear from on how record inflation is impacting their budgets and operations.  According to the fiscal division of the Legislative Services Agency, gas prices in Alabama have increased 181% between 2020 and 2022.

So far in the 2022 fiscal year, state government expenditures have totaled about $29.16 billion, Kirk Fulford, deputy director of the agency, told lawmakers. About 10% of those expenditures are items that are impacted by increased costs. Fulford said agencies with capital expenses are dealing with inflation. Lumber costs have increased 173% since 2020.

In May, consumer prices rocketed up 8.6% from a year earlier, the biggest jump since 1981, the Associated Press reported. In response, the Federal Reserve this week raised its benchmark interest rate by three-quarters of point this week as it tries to avoid a recession.

While state revenues, still buoyed by federal COVID-19 relief, have grown so far this year,  leaders are bracing for a dip.

Through May, revenues into the state’s General Fund budget are ahead of pace to support planned spending, Fulford said, and he’s not anticipating any issues for the remaining months of the 2022 fiscal year that ends in September.

Meanwhile, the 2023 General Fund doesn’t need revenue growth to meet planned expenditures, he said.

“Even if we had a minor blip at this point, we’d be OK for the short-term,” he said.

Fulford said he’s watching closely the simplified sellers use tax — online sales tax — as prices increase. The revenue stream has been a rising star in the General Fund in recent years. Last month, it grew by 9.5% year over year in the General Fund.

“That sounds like a lot, but consider that it grew by almost 40% last year and through (April) had grown by nearly 20%,” Fulford said.

That’s an indication that as the prices of items get higher and people have to spend more money on gas and food, they’re unwilling to make unnecessary purchases.

The Education Trust Fund, which largely relies on sales and income tax, is still healthy, he said. But those two revenue sources would be immediately hurt by changes in the economy.

“It doesn’t take much of an economic slowdown to have a big impact on the Education Trust Fund,” Fulford said. “… If there is a recession, you will see it here.” 

Lawmakers also heard from Alabama Medicaid Agency Commissioner Stephanie Azar. She said a recession would impact Medicaid when people lose jobs and become eligible for health care for the low-income.

She said in previous recessions, a 1% increase in unemployment has correlated to a 1.3% increase in Medicaid enrollment.

More of the informal budget hearings are expected in July and August. 

Ward told lawmakers that state agency leaders are aware the state’s record-budget situation is changing.

“I think there’s a real realization that the sugar high is over,” Ward said.